A high-ranking Department of Housing and Urban Development official and two partners defaulted on more than $1 million in federal and state government loans used to set up a New York company that shut down nine months later without doing any business.
Jayne Gallagher, HUD's director of public affairs, was treasurer and one-third owner of the firm, Concrete Elements Corp., a concrete manufacturing company that went out of business in September 1981. A complex tax shelter for the company, set up by two of her husband's relatives, also collapsed, she acknowledged this week.
The Internal Revenue Service placed a $37,028 lien on Gallagher's Nassau County home for taxes the corporation failed to pay, a debt she did not report on the financial disclosure statement required by HUD. Gallagher said her attorney advised her not to report the lien because she believed she did not owe that much and was negotiating with the IRS.
HUD Secretary Samuel R. Pierce Jr. said yesterday he had asked the agency's inspector general to "review" Gallagher's records, including the "alleged misinformation in her financial disclosure forms."
Pierce said he was informed in May 1984, soon after Gallagher came to the agency, that a "partial" background probe of Gallagher by the Federal Bureau of Investigation "revealed the existence of two pending judgments" against her, but said the rest of the report was favorable.
Sources said that in early 1984, Gallagher was considered for nomination as assistant secretary for public affairs, a presidential appointment requiring a background check by the FBI. The Office of Personnel Management checks other federal employes, according to a HUD official.
However, Pierce and a White House spokesman said Gallagher was never nominated for the post of assistant secretary for public affairs.
Pierce said he and senior HUD officials decided the agency "could not justify an assistant secretary post" for the agency's small public affairs staff, and, as a result, "the White House never nominated her to take that position, and she is not a presidential appointee. She is in the senior executive service."
Gallagher joined the founders of Concrete Elements Corp. in 1980, when she took on the job of raising money to start up the company, she said.
Concrete Elements got a $550,000 loan guarantee from the SBA, although the company president, Jacob Lamar, had defaulted on another SBA loan for $350,000 in 1975, according to SBA records.
When the application for the federal loan was filed, Lamar failed to disclose the default, according to the SBA. He also failed to disclose tax liens and other unpaid debts, according to Newsday, which first made public Gallagher's financial problems. Lamar could not be reached for comment. However, according to Newsday, Lamar denied misleading the agency.
Gallagher said she raised all the money to set up the company, including more than $400,000 from about 15 investors, the loans from the SBA and the New York state agency, as well as a direct loan of $275,000 from the federal Economic Development Administration. The company also defaulted on the loans from EDA and the state, according to those agencies. EDA sold the collateral for the loan, which was machinery and equipment from the plant, for about $1,100, EDA officials said.
Newsday said Gallagher's husband's relatives, Francis Hayman Jr. and John Hayman, and a third man who set up the tax shelter for the company received at least $250,000 in fees for their work. The Haymans did not return phone calls, and Gallagher said they received considerably less than this amount. Gallagher's husband was not involved in other aspects of the company.
The prospects looked bright for the concrete company established in 1980 by Lamar, Gallagher and New York attorney James Rhone, according to Gallagher. A commercial construction boom in New York City had created "a tremendous need for [concrete] road dividers," she said.
Rhone and Lamar also had negotiated a deal under which Concrete Elements would buy machinery from Consolidated Edison and supply the big utility firm with $250,000 worth of Concrete Elements-manufactured equipment annually, according to Gallagher.
Rhone said he was only a stockholder in the company and that he had no time to discuss the company further.
Concrete Elements bought an old concrete plant on the Hudson River near New York City and set up shop. Gallagher said she "thinks" the firm "made a few concrete [water run-off] ditches for the Navy" on which it broke even, but did not "last long enough" to get any other work it could complete. The company "negotiated" unsuccessfully for jobs in New York, according to Gallagher. Before Consolidated Edison was ready for any equipment to be supplied under the contract with Concrete Elements, the corporation was broke, she said.
"I don't know why we were unsuccessful. I did nothing but lose" on the concrete venture, she said. Those losses included $80,000 of her own money she invested in the company, she added.
Gallagher said negotiations with the IRS lowered her tax liability for the company to $13,000, of which she has repaid $10,000.
Gallagher said "she would not have signed up" to join Concrete Elements if she had known Lamar's credit history.
The Small Business Administration gave Concrete Elements the loan guarantee after receiving a New York credit agency report saying Lamar had an unblemished credit record, said James P. T. Jennings Jr., an SBA spokesman. The agency has no way of checking its own records to discover whether an applicant has ever applied for or received an SBA loan. Until this year, the SBA and other government agencies did not report borrowers who defaulted on federal loans to private credit agencies, Jennings said.
SBA guaranteed 90 percent of a $550,000 loan, making its loss on the defaulted loan $500,000, said Jennings. He said the agency is confident it will recover the loss and perhaps make money when it sells the concrete plant.
The SBA inspector general is "looking into" the reports that Concrete Elements' application contained misrepresentations, he said, adding that applicants who make false statements are committing fraud.